You’ve probably noticed my repeated reference to Months of Inventory (MoI) lately, as it relates to the state of the real estate market today in recent posts. As a macro measuring tool, Months of Inventory is a reasonably good way of judging current demand for housing.
It’s widely agreed that when inventory levels fall between 5 & 7 months, that the market will be considered balanced. Housing prices should be stable, perhaps rising slightly, influenced more by inflation than by demand. When inventory levels exceed 7 months, then the demand for housing is low, and prices are likely to fall. The high number of homes for sale will create a buyer’s market, allowing buyer’s to dictate price and terms to the majority of sellers if a seller wants to make a deal. When inventory levels fall below 5 months, sellers have more control over price and terms, often resulting in a more significant rise in housing prices, aka a seller’s market.
Recent data has shown that there are many sub-markets in the Phoenix area that are clearly in a seller’s market. 2.2 months of inventory for homes below $100K, means that nearly every home that goes up for sale is surely attracting significant attention in that price range. Location and condition will take a back seat in a buyer’s mind, as just getting a home now, before they are all gone will seem more important than anything that doesn’t seem quite right about the home.
Likewise, the luxury and ultra-luxury market with 40-50 months worth of inventory indicates that any buyer that can afford a home in at that price range will be faced with a near limitless range of choices, and should they choose to make a purchase, undoubtedly will be able to dictate every term of the deal to the seller, should that seller’s home be deemed worthy of purchase. In a market as such, only the very best homes have any chance of sale. Location, condition, and willingness to deal all need to be perfect, if a deal is to get done, with demand as weak as it is right now in the luxury market.
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I really enjoy the work and posts that you do; i read a lot of real estate blogs and this one has some of the best quantitative data and explanations around. I learn a ton from your blog, keep up the good work!
My mother is attempting to sell her townhouse in the Florida Keys. From other websites I found out that the Months of Inventory is 33, and I found out that the definition of Months of Inventory is:
Number of Properties for Sale
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Number of Homes Sold in Most Recent 30 Days
Your description of MoI filled the void between me knowing what MoI was in terms of arithmetic and me knowing how to actually make use of MoI in terms of advising my mother re: setting an asking price. No wonder your website ranked 2nd when I entered the search string “real estate ‘months of inventory’ definition” in Google.com – thanks very much for your help!
I’ll check your blog again should I have any more real estate questions. It shows a lot of class on your part for you to take the time to assist the general public.
Jeffrey, I’m glad to help. Best of luck with your mom’s townhouse in Florida.
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